Reference no: EM133001872
As a financial analyst for Dorval Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm. The installed cost of this equipment would be $500,000 and the equipment will be depreciated on a straight-line basis over a 5-year estimated useful life. At the end of five years, the equipment would have a salvage value of $75,000. If purchased, the needed capital can be borrowed at a12% pre-tax annual rate. Should the company choose to purchase the equipment rather than lease it, the company would incur additional pre-tax operating costs of $15,000 per year. The company is in the 40% tax bracket and the weighted after-tax rate of capital (WACC) is 15 percent. Pre-tax lease payments are 130,000 per year for the next five years, with the payments being made at the end of each year.
A) What is the cost of Borrowing and Buying (COBB)?
B) What is the cost of leasing (COL)?
C) What is the net advantage to leasing (NAL)?
D) What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease?
E) This lease would be classified as a(n)?
F) What is the appropriate discount rate for valuing the lease?
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: As a financial analyst for Dorval Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm.
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